Different car segments in India and their tax implications

Across the diverse car segments available in India, one thing remains constant — taxes. GST is levied at a rate of 28 percent on all cars sold in India, except electric vehicles which attract a GST of 5 percent. The additional cess levied on a car differs according to a combination of factors including body type, length of car, fuel type, engine size, ground clearance and levels of localisation in manufacturing. It all amounts to India having some of the highest taxes on cars in the world. 

How does one save on taxes while buying a car then? There is no straightforward answer but knowing what the tax implications are for different car segments will help you make an informed car-buying decision.

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Tax Implications for Each Car Segment in India

While car segments in India are categorized based on the length of the vehicle, taxes are calculated according to the length of the vehicle, as well as engine capacity and body style, along with ground clearance in the case of SUVs. 

Small cars under sub-4-metres in length are taxed between 29-31 percent, while mid-size, large cars and SUVs can attract taxes as high as 50 percent. On the other hand, hybrid cars or electric vehicles across segments enjoy lower taxes. Here is a breakdown of all the body styles and how taxes are applied to them.
 

Hatchbacks

• Cars under 4 metres in length and having petrol engines under 1.2 litres fall under the overall tax rate of 29 percent 
   
• For a Maruti Suzuki Swift with an ex-showroom price of ₹6.48 lakh, a buyer pays ₹1.88 lakh in taxes 
   
• For cars under 4 metres in length and diesel engines under 1.5 litres, the tax rate is 31 percent
   
• The only diesel hatchback on sale in the country is the Tata Altroz, also making it the cheapest diesel car in India 
   
• Road tax on small cars is also generally lower than other segments, as it’s calculated according to the size of the vehicle, engine capacity or price depending on which state it’s being registered in

Sedans

• Compact sedans under 4-metres in length are popular as they offer some of the benefits of the larger segment sedans, but are taxed at the lower rate of 29 percent, resulting in more affordable cars
   
• For a Honda Amaze with an ex-showroom price of ₹7.99 lakh, a buyer pays ₹2.31 lakh in taxes
   
• Sedans over the 4-metre length classification with engines up to 1.5-litre are taxed at 45 percent 
   
• For a Honda City with an ex-showroom price of ₹11.8 lakh, a buyer pays ₹5.3 lakhs in taxes
   
• Sedans over the 4-metre mark and with engines larger than 1.5-litre (both petrol and diesel) are taxed at 48 percent 

SUVs and MPVs

• For tax calculation purposes, the term SUV is applied to vehicles over 4 meters long, engine size above 1.5-litre and more than 170mm ground clearance. SUVs are taxed at 50 percent 
   
• For a Hyundai Creta SUV with an ex-showroom price of ₹10.9 lakh, a buyer pays ₹5.49 lakh in taxes
   
• Similar to compact sedans, compact SUVs gain some tax benefits by falling into the sub-4 metre category taxed between 29-31 percent
   
• For a Hyundai Venue compact SUV with an ex-showroom price of ₹7.94 lakh, a buyer pays ₹2.3 lakh in taxes
   
• Ground clearance cutoff is a loophole that some manufacturers have tried to exploit for some larger SUV models, by mounting additional equipment on the underbody to technically “lower” ground clearance. Mahindra took advantage of this loophole with the 2013 XUV500 to lower the ground clearance from 200mm to 160mm and lower prices. This loophole isn’t in use any longer. 

Luxury Cars

Luxury cars are generally manufactured in other countries and imported to India, attracting high duties. Though, major players like Mercedes-Benz, BMW, Land Rover and Audi have switched from CBUs to SKDs and CKDs over the years. This can result in significant savings for the buyer. For example, the locally-assembled Range Rover is over ₹56 lakh cheaper than the CBU version. 
 

Tax Structure on Cars in India

The introduction of GST in 2017 was meant to unify tax structures across the country and industries, doing away with state-levied cascading taxes. With the move to GST, many were expecting the tax burden on cars to be lowered. That was initially the case with a lower flat GST of 18 percent on automobiles and lower compensation cess based on vehicle size, engine size, body type, and ground clearance. For those wondering, the compensation cess is meant to compensate state governments for the loss of revenue from the implementation of GST. 

The current tax structure on cars levies a flat GST rate of 28 percent plus compensation cess, however, this results in similar or greater taxes overall than before. While the taxation structure is only loosely based on car segments, there is a correlation. Car segments are based on the length of the vehicle only, the factors affecting taxes on cars include vehicle length, engine capacity, fuel type, body type and ground clearance. Some factors are applied in conjunction with others, such as the SUV body type and ground clearance rule. 

It is clear that smaller cars with small petrol engines are taxed the least, apart from electric vehicles of all sizes and hybrids. SUVs above 4m in length, with engines larger than 1,500cc and with ground clearance greater than 170mm attract the highest taxes. 

Note that a new car’s ex-showroom price includes GST and additional cess but doesn’t include state-levied road tax, insurance and RTO registration charges. Used cars sold from a second-hand car dealership attract a GST of 12 percent levied on the profit the dealer makes from the sale of the car — a factor that may or may not affect the end buyer.  

Road Tax and Registration Charges 

State governments impose road tax based on various factors including engine capacity, unladen weight, seating capacity, cost (ex-showroom) price of vehicle and number of vehicles registered under a single owner. Road tax charges vary from state to state, reflecting the on-road price of new cars varying between states. Himachal Pradesh has the lowest road tax in India, while Karnataka has the highest road tax in India. 

Customs and Duties on Imported Cars in India 

There are also import customs and duties to be considered. Vehicles are broadly classified by production/assembly location — locally manufactured, SKD (Semi Knocked Down), CKD (Completely Knocked Down) or locally assembled, CBU (Completely Built Up)/full-import. For CBUs, the CIF (Cost, Insurance and Freight) value is used to calculate the taxation. 

Tax Benefits for Electric and Hybrid Cars

The government is actively trying to push the sale of electric vehicles and alternate fuel vehicles, even over efficient internal combustion technology like strong hybrids. EVs are taxed at 5 percent, while hybrids are taxed at 43 percent. There is a lower tax rate of 28 percent for small hybrids but no vehicle currently fits that criteria. Similarly, hydrogen fuel cell vehicles are taxed at 12 percent but no vehicle fits this criteria either. However, certain states such as Uttar Pradesh, offer a road tax waiver for hybrid cars to lower the overall cost to the buyer.

Electric vehicle incentives under FAME II subsidies were also instrumental in EV adoption but have ended as of March 2024. Some states still offer EV subsidies in the form of road tax redemption for a limited number of vehicles to attract buyers. Further, a deduction of up to ₹1.5 lakh for interest payments is made available for individuals purchasing an EV under finance. 

How Tax Implications Impact Buying Decisions

While taxation typically isn’t an upfront consideration for buyers, certain segments of cars are taxed less heavily than others. For the value-conscious buyer, a small car would be the best option. Less upfront costs including road taxes and insurance and lower running and maintenance costs are all factors to consider. 

For a value-conscious buyer irrespective of segment, the tax implication on a car could sway their buying decision. For example, the top-variant MG Astor turbo automatic with a price tag of ₹18.54 lakh ex-showroom includes taxes at 45 percent. The MG ZS EV base variant is priced at ₹18.98 lakh ex-showroom, going up to ₹25.54 lakh including taxes of just 5 percent. For essentially a similar price to the top variant Astor, a buyer can purchase an all-electric ZS EV with a few compromises in features. With the lower running costs of EVs also factored in alongside the lower taxes, the EV looks like better value for money. 

Conclusion

Ultimately, tax implications on cars are an inescapable truth. Whether or not it affects your buying decision, it pays to know just how much of a car’s ex-showroom price is made up of taxes. The formula is simple: smaller cars are taxed less and bigger cars with bigger engines are taxed more.